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Politicians: Price Controls Don't Work

A grinch who wanted to create an energy crisis would prevent new energy supplies from being tapped or created and limit return on investment in energy production to reduce or eliminate economic incentives. He'd micromanage energy supply and demand by promoting grossly inefficient "boutique" energy sources such as solar and wind power while imposing myriad environmental regulations that require "boutique" energy products. Meanwhile, he would demand energy austerity by the public under the rubric of "energy conservation."

California has done all of the above, and the result is predictably disastrous: Threats of rolling brownouts, darkened Christmas lights, record-high wholesale prices (over $1,000 per kilowatt-hour!) and even calls for the state to take over the energy industry. California's government is at war with the Federal Energy Regulatory Commission over its refusal to cap power rates. Instead, FERC is trying to make it easier for California utilities to contract with other power suppliers. California's officials should have learned from last summer's heat wave - when surging power demand led Cal-ISO, which manages the state's power grid - to cap wholesale power prices at $250 a kilowatt-hour. That encouraged power companies to sell power anywhere but in California at a time when in-state supply was already unable to cope with demand. There's a lesson here that politicians never seem to learn: Price controls don't work.

The media spin the situation in California as a dramatic failure of deregulation, since the Golden State passed a partial deregulation plan for the power industry in 1996. But "partial" is the key word here, since the state thwarted creation of new power sources and did nothing to encourage new suppliers

California wrongly assumed stable demand just when Silicon Valley and Southern California were about to explode with new economy industries no one had dreamed of before. Thanks to a combination of radical environmental ideology and "not-in-my-back-yard" opposition to new power plants, California hasn't built a new power plant in 15 years. Ironically, California has just restarted a mothballed nuclear power plant in San Luis Obispo despite the state's antipathy to nuclear energy.

Letting prices and markets adjust, combined with short-term conservation measures, should enable Californians to weather the current crisis. In the long run, though, the only meaningful conservation comes in response to price indicators - when energy starts to cost too much, we try to find ways to use less of it and to use what we must use more efficiently. President-elect George W. Bush has already expressed concern that without a supply-side energy policy, California's crisis could be the first of many.

California's problems are aggravated by its mania for becoming an ecological utopia, which affects not just power plant construction but the cost of generating power under the state's aggressive emissions limits. Limited power has been available from the Pacific Northwest, which had a cold snap of its own and whose hydropower capacity has been limited by dry weather.

The whole idea of having reserve capacity is to be able to meet crisis-driven peak demand without overwhelming the power grid. California hasn't done that, and the government will only worsen the situation if it yields to pressure to ban out-of-state sales by California power companies. That will only backfire. California is an extreme example, but the United States as a whole lacks a coherent market-based energy policy. We suppress nuclear power despite its ecological benefits (no emissions and an excellent safety record), we limit use of our abundant coal reserves out of concern for air quality, and we tightly regulate prices and supply in every state of the union, so politicians can appear to be consumer-friendly. But a spasm of energy austerity is no way to help the consumer.

Not only do we subordinate the goal of steady, reliable energy supplies to an extremist ecological and political agenda, we've completely failed to grasp that the new economy is driving much of the growth in energy demand and is a sector that needs near-100 percent reliability from the power grid. .As Thomas Mulligan wrote in the Los Angeles Times, where high tech is concerned, "Certain cutting-edge operations require what engineers call 'six nines,' or 99.9999 percent reliability."

California, center of the high-tech world, has to do better. But so does the rest of the country. That means more diversified sources of energy, market pricing, ending regulatory barriers to new plant construction and balancing ecological concerns with the demands of everyday life in this brand-new technological century. The fastest-growing, most advanced economies always do the best job of protecting the environment. Growth truly is green, and it's too bad California has to learn that lesson the hard way.

Jack Kemp is co-director of Empower America and Distinguished Fellow of the Competitive Enterprise Institute. Distributed by Copley News Service.